The Unassuming Economist

“House prices are high, but it’s too early to call it a bubble,” according to an IMF study on the Swiss Housing Market: What are the risks? It says that “real house prices are high, and at an all-time high for owner-occupied apartments. Prices have been on an increasing trend since the late 1990s and the average price for a single family home has increased by about 49 percent. Prices for owner occupied apartments have increased even more (72 percent) and in the last four years the annualized price increase (5 1/2 percent) substantially exceed nominal GDP growth. When deflating house prices by the CPI, owner-occupied apartment prices are slightly above the peak of the boom-bust period in the late 80s to early 90s. Single family home prices are still below the peak, but still high by historic standards. Residential house price increases are especially pronounced in certain segments and region. Turning to regional patterns, Geneva stands out with price increases far exceeding the other regions in both the single family home and the owner occupied segments. It is also important to note that the price increases started from already high price levels.” 

However, “current prices look less elevated when compared to income and rents. Following the
boom in the late 80s housing prices fell dramatically and their subsequent growth remained
subdued relative to growth in rents and in GDP per capita until the late 2000s, when housing price growth accelerated. While these ratios are still well below the levels reached at the peak of the previous boom, the ratio of price to rents for owner occupied apartments is already 15 percent above its long-term average.”

“Real estate prices have continued to increase steadily through the financial crisis, outpacing increases in other advanced countries,” according to the IMF’s annual economic report on Belgium. It says that “prices have increased by 60 percent in real terms since 2000, and—unlike in other EU countries—there has been no price correction during the crisis. Marked increases in price-to-income and price-to-rent ratios relative to historical average suggest significant overvaluation. However, these measures do not account for the fact that housing was relatively inexpensive to begin with, and that there is therefore a large catching up effect underlying the rise of these indicators. Also, the rental market is very narrow as it is focused only on low-income social housing on one hand and high-end apartments in Brussels on the other. A broader assessment, including a comparison of absolute price levels relative to the rest of Europe, suggests that the degree of overvaluation is of the order of 5 to 20 percent.”

House prices are high in New Zealand, according to a new report by the IMF. Although affordability metrics are difficult to interpret, most show a significant deterioration in the last two decades. The median house to income ratio rose from 3 in 2000 to about 5 in 2007, before declining to about 4½ in the last five years as incomes outpaced nominal house price growth. This ratio is somewhat higher than that of several peer countries. Despite the recent decline, various measures still point to overvalued house prices. Model based analysis suggests an overvaluation of about 25 percent. Price income ratios are 20 percent higher than the average of the last three decades. Price to rent ratios, which also rose significantly during last boom, show an even larger overvaluation, although rent values in New Zealand are distorted by the large stock of public housing, which serves about 5 percent of the population.

From this high base, house prices are beginning to rise again, particularly in Auckland and Christchurch. Real house prices post-2008 had been relatively stable until recent months, when nation-wide annual house price inflation picked up to over 5 percent.Auckland has had price increases of almost 12 percent for some months. The recent price pick up creates the risk of speculative demand that could induce price overshooting. Supply response will take time, and increased demand is likely to continue. Continue reading here. 

For more information, see the IMF’s new economic report on Malaysia. 

Global Housing Market: Spring in the air?

In a special report on house prices on March 30th 2002, the Economist said that if there is one single factor that has saved the world economy from a deep recession it is the housing market. In contrast, during the Great Recession (December 2007 to June 2009), the housing market was cast as the villain of the piece. How has the housing market fared since the end of the Great Recession? An updated global index of house prices has shown a mild sign of an uptick. Both the equally-weighted index and GDP-weighted index measures of global house prices show signs of improvement in house prices (see Chart 1).

Chart 1. Global House Price Index

Zooming in, house prices around the world have followed different trajectories. In some parts of the world, house prices have appreciated or recovered, in others they continue to fall. For example, house prices for the United States have improved, while the outlook for house prices in a good part of Europe is gloomy.

Chart 2. House Prices around the World

Still room for house price correction?

Chart 3 shows that in Canada, Belgium, Australia, United Kingdom and others, the house prices-to-income ratio and the house prices-to-rent ratio is still above historical averages. At the the other end, in Japan, United States, Germany, Greece and other countries, these rations are now below historical averages.

Chart 3. House Prices Relative to Incomes & Rents: Current Ratios Compared With Historical Averages 

Assessing the outlook for house prices requires a more detailed look than just these historical ratios. In recent months, IMF staff have written about the outlook in Canada, Denmark, France, Hong Kong, Ireland and South Korea.